OECD sees Czech economy stagnating this year, tight monetary stance needed

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PRAGUE, March 30 (Reuters) – The Czech economy will stagnate this year due to shocks from Russia’s war in Ukraine that have boosted inflation, and tight monetary policy needs to continue until price growth is firmly easing to target levels, the Organisation for Economic Cooperation and Development (OECD) said on Thursday.

The OECD said the central European country needed to start fiscal consolidation after significant loosening in recent years and due to pressures from population ageing.

The OECD forecast gross domestic product eking out a 0.1% rise this year before accelerating to 2.4% growth in 2024.

“Economic growth will be subdued in 2023 and pick up in 2024 amid reduced supply disruptions and resuming expansion in trading partners,” the OECD’s economic survey of the country said.

It said inflation will start falling from the current high levels – at 16.7% year-on-year in February – but will only approach the central bank’s 2% target towards the end of 2024.

This is slower than forecast by the central bank, which sees inflation at 2.3% already in the first quarter of 2024.

The OECD said the country had to consolidate the budget to avoid a “dramatic” debt jump in the medium to long term.

“The Czech Republic faces high fiscal pressures in the medium to long term that threaten fiscal sustainability. Action on both the expenditure and revenue sides should be considered,” it said.

It said fiscal rules have been relaxed, and personal income taxes were low especially after a permanent cut in 2020.

The current main centre-right party in the government coalition had backed that tax cut and remains opposed to any increase in income taxes.

It has, however, been considering some increase in property taxes which have been very low relative to peers. The OECD recommended a shift toward real estate, consumption and environmental taxes, while reducing social security contributions which drive up labour costs.

OECD said that taking into account early retirements, Czech workers retire much earlier than in most OECD peers, which aggravated pressures from a rapidly ageing population.

The government has been mulling a fiscal package including spending cuts and some mild tax increases, as well as changes to the pension system to help bring budgets into better shape, with final proposals due later this spring.

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